FORECASTING

Definition of Forecasting
 According to Investopedia, “Forecasting is a technique
that uses historical data as inputs to make informed
estimates that are predictive in determining the
direction of future trends. Businesses utilize forecasting
to determine how to allocate their budgets or plan for
anticipated expenses for an upcoming period of time.
This is typically based on the projected demand for the
goods and services offered.”
 A planning tool that helps management in its attempts to cope with the uncertainty
of the future, relying mainly on data from the past and present and analysis of
trends.
 In other words, we can say that forecasting is determining what is going to
happen in the future by analyzing what happened in the past and what is going on
now. It is a planning tool that helps business people in their attempts to cope with
the uncertainty of what will might and might not occur. Forecasting relies on past
and current data and analysis of trends.
 Forecasting starts with certain assumptions based on the management's experience,
knowledge, and judgment.
 These estimates are projected into the coming months or years using one or more
techniques such as Box-Jenkins models, Delphi method, exponential smoothing,
moving averages, regression analysis, and trend projection.
 Forecasting is an important component of Business
Management.
 It is essentially a technique of anticipation and provides vital
information relating to the future. It is the basis of all planning
activities in an organization. It involves collecting valuable
information about past and present and estimating the future.
Forecast is an estimate of what is expected to happen in some
future period.
 According to Fayol-the father of modern management—
“Forecasting is the essence of management. The success of a
business greatly depends upon the efficient forecasting and
preparing for future events.”
 Investors utilize forecasting to determine if events affecting a
company, such as sales expectations, will increase or decrease
the price of shares in that company. Forecasting also provides
an important benchmark for firms, which need a long-term
perspective of operations.
 Stock analysts use forecasting to extrapolate how trends, such
as GDP or unemployment, will change in the coming quarter
or year. The further out the forecast, the higher the chance that
the estimate will be inaccurate. Finally, statisticians utilize
forecasting in any situation that requires the use of forecasting.
For instance, data may be collected regarding the impact of
customer satisfaction by changing business hours or the
productivity of employees upon changing certain work
conditions.
 Forecasting addresses a problem or set of data. 
 Economists make assumptions regarding the situation

being analyzed that must be established before the

variables of the forecasting are determined.
 Based on the items determined, an appropriate data set

is selected and used in the manipulation of information.

The data is analyzed, and the forecast is determined.
Finally, a verification period occurs where the forecast
is compared to the actual results to establish a more
accurate model for forecasting in the future.
FORECASTING / PREDICTION
 Prediction is concerned with estimating the outcomes
for unseen data.
 Forecasting is a sub-discipline of prediction in which

we are making predictions about the future, on the

basis of time-series data. Thus, the only difference
between prediction and forecasting is that we consider
the temporal dimension.
Forecasting Methods
 Stock analysts use various forecasting methods to determine how a stock's price
will move in the future. They might look at revenue and compare it to economic
indicators.
 Changes to financial or statistical data are observed to determine the relationship
between multiple variables. These relationships may be based on the passage of
time or the occurrence of specific events. For example, a sales forecast may be
based upon a specific period (the passage of the next 12 months) or the
occurrence of an event (the purchase of a competitor’s business).
 Qualitative forecasting models are useful in developing forecasts with a limited
scope. These models are highly reliant on expert opinions and are most beneficial
in the short term.
 Examples of qualitative forecasting models include market research, polls, and
surveys that apply the Delphi method. Quantitative methods of forecasting
exclude expert opinions and utilize statistical data based on quantitative
information. Quantitative forecasting models include time series methods,
discounting, analysis of leading or lagging indicators, and econometric modeling.
Features of forecasting
 Forecasting in concerned with future events.
 It shows the probability of happening of future events.
 It analysis past and present data.
 It uses statistical tools and techniques.
 It uses personal observations.
Steps in forecasting
1.) Analysing and understanding the problem : The manager must first
identify the real problem for which the forecast is to be made. This will
help the manager to fix the scope of forecasting.

2.) Developing sound foundation : The management can develop a sound

foundation, for the future after considering available information,
experience, type of business, and the rate of development.

3.) Collecting and analysing data : Data collection is time consuming.

Only relevant data must be kept. Many statistical tools can be used to
analyse the data.
Steps in forecasting
 Estimating future events : The future events are estimated by using
trend analysis. Trend analysis makes provision for some errors.
 Comparing results : The actual results are compared with the
estimated results. If the actual results tally with the estimated results,
there is nothing to worry. In case of any major difference between the
actuals and the estimates, it is necessary to find out the reasons for
poor performance.
 Follow up action : The forecasting process can be continuously
improved and refined on the basis of past experience. Areas of
weaknesses can be improved for the future forecasting. There must be
regular feedback on past forecasting.
Cont..
 where a company wishes to forecast with
reference to a particular product, it must
consider the stage of the product’s life cycle
for which it is making the forecast.
DEMAND FORECASTING
 the process of predicting the future demand for the firm’s product.
Simply, estimating the potential demand for a product in the future is
called as demand forecasting.
 The business world is characterized by risk and uncertainty, and most
of the business decisions are taken under this scenario. An organization
come across several risks, both internal or external to the business
operations such as technology, attrition, unrest, employee grievances,
recession, inflation, modifications in the government laws, etc.
 Predicting the future demand for a product helps the organization
in making decisions in one of the following areas:
 Planning and scheduling the production and acquiring the inputs
accordingly.
 Making the provisions for finances.
 Formulating a pricing strategy.
 Planning advertisement and implementing it.
 Demand forecasting holds significance in the businesses
where large-scale production is involved.
 Since the large-scale production requires a long gestation
period, a good deal of forward planning should be done.
Demand forecasting may not be a serious issue for the small
scale firms which supply a small portion of total demand or
produces the product that caters to the short demand or
seasonal demand. Such firms can plan their production on the
basis of the business skills and their past experiences.
 The potential future demand should be estimated to avoid the
conditions of overproduction and underproduction. Most often,
the firms face a question of what would be the future demand
for their product as they have to acquire the input (labor and
raw material) accordingly.
 The objective of demand forecasting is attained only
when the forecasting is done systematically and
scientifically. Thus, the following steps in demand
forecasting are followed to facilitate a systematic
estimation of future demand for product:
 Specifying the Objective
 Determining the Time Perspective
 Choice of method for Demand Forecasting
 Collection of Data and Data Adjustment
 Estimation and Interpretation of Results
Steps in Demand Forecasting
1. Specifying the Objective: The objective for which the
demand forecasting is to be done must be clearly
specified. The objective may be defined in terms of;
long-term or short-term demand, the whole or only the
segment of a market for a firm’s product, overall
demand for a product or only for a firm’s own product,
firm’s overall market share in the industry, etc. The
objective of the demand must be determined before the
process of demand forecasting begins as it will give
direction to the whole research.
2. Determining the Time Perspective:  It is essential to
define the time perspective, i.e., the time duration for
which the demand is to be forecasted. On the basis of
the objective set, the demand forecast can either be for
a short-period, say for the next 2-3 year or a long
period. While forecasting demand for a short period (2-
3 years), many determinants of demand can be assumed
to remain constant or do not change significantly.
While in the long run, the determinants of demand may
change significantly.
3. Making a Choice of Method for Demand
Forecasting: 
Once the objective is set and the time perspective has
been specified the method for performing the forecast
is selected. There are several methods of demand
forecasting falling under two categories; 
 survey methods and statistical methods.
 The Survey method includes consumer survey and

opinion poll methods.

 The statistical methods include trend projection,

barometric and econometric methods. The forecaster

must select the method that best suits his requirement.
Choosing right forecasting technique
 Sound predictions of demands and trends are a
necessity, if managers are to cope with seasonality,
sudden changes in demand levels, price-cutting
maneuvers of the competition, strikes, and large swings
of the economy. Forecasting can help them deal with
these troubles.
Choosing right forecasting technique
  To handle the increasing variety and complexity of managerial forecasting
problems, many forecasting techniques have been developed in recent
years.
 Each has its special use, and correct technique for a particular application
must be wisely selected. The manager as well as the forecaster has a role to
play in technique selection; and the better they understand the range of
forecasting possibilities, the more likely it is that a company’s forecasting
efforts will bear fruit.
 The selection of a method depends on many factors—the context of the
forecast, the relevance and availability of historical data, the degree of
accuracy desirable, the time period to be forecast, the cost/ benefit
(or value) of the forecast to the company, and the time available for making
the analysis.
 These factors must be weighed constantly, and on a variety of levels. In
general, for example, the forecaster should choose a technique that makes
the best use of available data.
CONT..
4. Collection of Data and Data Adjustment: Once the
method is decided upon, the next step is to collect the
required data either primary or secondary or both. The
primary data are the first-hand data which has never
been collected before. While the secondary data are the
data already available. Often, data required is not
available and hence the data are to be adjusted, even
manipulated, if necessary with a purpose to build a data
consistent with the data required.
5. Estimation and Interpretation of
Results: Once the required data are collected
and the demand forecasting method is
finalized, the final step is to estimate the
demand for the predefined years of the
period. Usually, the estimates appear in the
form of equations, and the result is
interpreted and presented in the easy and
usable form.
 Thus, the objective of demand forecasting

can only be achieved only if these steps are

followed systematically.
METHODS OF DEMAND
FORECASTING

STATISTICAL
SURVEY METHODS METHODS

TREND ECONOME-
CONSUME OPINION BAROMETRI
PROJECTIO TRIC
R SURVEY POLL C
N METHODS
1. Survey Methods: Under the survey method, the consumers are contacted directly
and are asked about their intentions for a product and their future purchase plans.
This method is often used when the forecasting of a demand is to be done for a short
period of time. The survey method includes:
i) Consumer Survey Method includes the further three methods that can be used to
interview the consumer:
a) Complete Enumeration Method: Under this method, a forecaster contact almost all
the potential users of the product and ask them about their future purchase plan. The
probable demand for a product can be obtained by adding all the quantities indicated
by the consumers. Such as the majority of children in city report the quantity of
chocolate (Q) they are willing to purchase, then total probable demand (Dp) for
chocolate can be determined as:
Dp=Q1+Q2+Q3+Q4+……+Qn
Where, Q1, Q2, Q3 denote the demand indicated by children 1, 2,3 and so on.

 limitations of this method :

i) it can only be applied where the consumers are concentrated in a certain region or
locality. And if the population is widely dispersed, then it can turn out to be very
costly.
ii) the consumers might not know their actual demand in future. Due to this, they may
give a hypothetical answer that may be biased according to their own expectations
regarding the market conditions.
b) Sample Survey: The sample survey method is often used when
the target population under study is large.
 Only the sample of potential consumers is selected for the
interview. A sample of consumers is selected through a
sampling method.
 Here, the method of survey may be a direct interview or mailed
questionnaires to the selected sample-consumers.
 This method is simple, less costly and even less time-
consuming as compared to the comprehensive survey methods. 
 The sample Survey method is often used to estimate a short-run
demand of business firms, households, government agencies
who plan their future purchases.
 However, the major limitation of this method is that a forecaster
cannot attribute more reliability to the forecast than warranted.
Cont…Sample Survey method
The probable demand, indicating the response of the consumers
can be estimated by using the following formula:
Dp=Hr/Hs *AD

Where Dp = probable demand forecast;

H = Census number of households from the relevant market;
Hs = number of households surveyed or sample households;
HR = Number of households reporting demand for a product;
AD = Average Expected consumption by the reporting
households (total quantity consumed by the reporting
households/ Number of households.
Cont..methods of demand
forecasting
c) End-use Method:  It is User Expectation Method, 
 the list of several users of the product under forecasting is
prepared first,
 who are then asked about their individual purchasing patterns and
 then from such information the complete product demand
forecast is ascertained.
 Simply, the method used to know the buyer’s likely consumption
of the product, his future buying plans and likely the market
share of the company.
 with the help of end-use method, a forecaster can pinpoint or
trace at any time in the future as to where, why and how the
actual consumption has been deviated from the estimated
demand.
 2.)  Opinion Poll Methods: These are used to collect opinions of those
who possess the knowledge about the market, such as sales
representatives, professional marketing experts, sales executives and
marketing consultants.

a) Expert-Opinion Method: Since sales representatives are in direct

touch with the customer, are supposed to know the future purchase
plans of their customers, their preference for the product, their reaction
to the introduction of a new product, their reactions to the market
changes and the demand for rival products.
 sales representatives are likely to provide an approximate, if not
accurate, estimation of demand for a target product in their respective
regions or areas.
 In the case of firms, which lack in sales representatives can collect
information regarding the demand for a product through professional
market experts or consultants, who can predict the future demand on
the basis of their expertise and experience.
  limitations of expert-opinion method:
a) Reliability of estimates or data provided depends on
skill or expertise of the professionals only.
b) There are chances of over or under-estimation of
demand due to the subjective judgment of the assessor.
c) The evaluation of market demand is often based on
inadequate information available to the sales
representatives since they have a narrow view of the
market.
B) The Delphi method:
 it is the extension of the expert opinion method

wherein the divergent expert opinions are

consolidated to estimate a future demand.
 The process of the Delphi technique is very simple.
 Under this method, the experts are provided with the

information related to estimates of forecasts of other

experts along with the underlying assumptions.
 The experts can revise their estimates in the light of

demand forecasts made by the other group of experts.

The consensus of experts regarding the forecast results
in a final forecast.
Cont…Survey methods
C) Market Studies and Experiments: Another alternative
method to collect information regarding the current as well as
future demand for a product is to conduct market studies and
experiments on the consumer behavior under actual, but
controlled market conditions.
 This method is commonly known as Market Experiment

Method.
 Under this method, a firm select some areas of representative

markets, such as three or four cities having the similar

characteristics in terms of the population income levels, social
and cultural background, choices and preferences of consumers
and occupational distribution. 
  Then the market experiments are carried out by
changing the prices, advertisement expenditure and all
other controllable factors under demand function, other
things remaining the same. Once these changes are
introduced in the market, the consequent changes in the
demand for a product are recorded. On the basis of
these recorded estimates, the elasticity coefficients are
calculated. These computed coefficients along with the
demand function variables are used to assess the future
demand for a product.
TECHNIQUES OF FORECASTING
 The techniques of forecasting can be grouped under:-
 1. Qualitative Techniques
 2. Quantitative Techniques
 3. Time Series Techniques of Forecasting
 4. Causal Modeling
 5. Technological Forecasting.
A.) QUALITATIVE TECHNIQUES
1.) Market Research Techniques:
Under this technique, polls and surveys may be conducted to find out the sale of a
product. This may be done by sending questionnaires to the present and prospective
consumers. In addition, this may also be interviewed personally, though questions and
interviews, the manager can find out whether the consumers are likely to increase or reduce
their consumption of- the product and if so, by what margin. This interviews etc., and
hence this method is somewhat costly and time consuming.

2.) Past Performance Technique : In this technique the forecasts are made on the basis of
past data. This method can be used if the past has been consistent and the manager expects
that the future will resemble the recent past.

3.) Internal Forecast:

 Under this technique indirect data are used for developing forecasts. For Example—For

developing sales forecasts, each area sales manager may be asked to develop a sales
forecast for his area. The area sales manager who is in charge of many sub-areas may ask
his salesmen to develop a forecast for each sub-area in which they are working. On the
basis of these estimates the total sales forecast for the entire concern may be developed by
the business concern.
3.) Deductive Method:
 Investigation is made into the causes of the present situation

and the relative importance of the factors that will influence

the future volume of this activity.
 The main feature of this method is that it is not guided by

the end and it relies on the present situation for probing into
the future.
 This method, when compared to others, is more dynamic in

character.
 It enables the management to get information as to the

future without being dependent on the past information.

 Delay in forecasting certain events or results is avoided.

The main drawback of this method is that it relies more on

individual judgment than on the past record.
5.) Jury of Executive Opinion:
 the management may bring together top executives of different functional areas
of the enterprise such as production, finance, sales, purchasing, personnel, etc.,
supplies them with the necessary information relating to the product for which
the forecast has to be made, gets their views and on this basis arrives at a figure.
 The opinion of experts is sought under this method and the meritorious one is
accepted.
 For example, an opinion on profitability of starting a new unit is received from
various experts and decision is made on the basis of experts’ opinion. The
opinion may be on the area of sales, finance, purchase and the like.
 Ideas are generated which can be evaluated for their feasibility and profitability.
 Experts may request comment on the opinion of the others in order to arrive at a
consensus of opinion.
 The reason for favoring a particular opinion by an expert is known to the
management.
 6.) Delphi Technique: This is another judgmental technique. Rand Corporation has
developed the Delphi method initially in 1969 to forecast the military events.
Then, it has been applied in other areas also.
 Here, a panel of experts is prepared. These experts are requested to give their

opinions in writing for a prescribed questionnaire.

 Their opinions are analyzed, summarized and submitted once again to the same

experts for future considerations and evaluations.

 The forecasting unit decides the experts whose opinions it wants to know.
 The authors of these opinions are not disclosed, so that no expert is influenced by

other’s opinions. This process is continued up to the stage at which a consensus

opinion is obtained. Delphi method is useful when past data are not available and
where the past data do not give an indication for the future events.
 The experts make their forecasts and the coordinator summarizes their responses.

Here, the experts express their views independently without knowledge of the
responses of other experts.
 On the basis of anonymous votes, a pattern of response to future events can be

determined.
 This technique is used to reduce the “crowd effect” or “group think” in which

everyone agrees with “the experts” when all are in the same room.
7.) Historical analogy: This method is most commonly
used. It is based on the belief that future trends will
develop in the same direction as past trends. It assumes
that the future will remain as in the recent past. Hence,
past trends are plotted on a graph or chart to show the
curve.
 Three forms of this method are in use:

(a) Taking the current years’ actual performance as base for

future prediction;
(b) Increasing certain percentages with the last year’s actual
performance to predict the future events; and
(c) Averaging the actual performance of the previous few
years.
B.) QUANTITATIVE TECHNIQUES:
 Trend Analysis Method: This is also known as ‘Time Series

Analysis’. This analysis involves trend, seasonal variations, cyclical

variations and irregular or random variations. This technique is used
when data are available for a long period of time and the trend is
clearly visible and stable. It is based on the assumption that past trend
will continue in future. This is considered valid for short term
projection. In this different formulas are used to fit the trend.
 Extrapolation Method :Extrapolation method is based on Time

series, because it believes that the behavior of the series in the past
will continue in future also and on this basis future is predicted. This
method slightly differs from trend analysis method. Under it, effects
of various components of the time series are not separated, but are
taken in their totality. It assumes that the effect of these factors is of a
constant and stable pattern and would also continue to be so in future.
 Regression Analysis Method: In this method two or
more inter-related series are used to disclose the
relationship between the two variables. A number of
variables affect a business phenomenon simultaneously
in economic and business situation. This analysis helps in
isolating the effects of various factors to a great extent.
 For example- there is a positive relationship between
sales expenditure and sales profit. It is possible here to
estimate sales on the basis of expenditure on sales
(independent variable) and also profits on the basis of
projected sales, provided other things remain the same.
Cont.. Quantitative techniques
 Econometric Model: Econometrics refers to the science
of economic measurement. Mathematical models are used
in economic model to express relationship among various
economic events simultaneously. To arrive at a particular
econometric model a number of equations are formed
with the help of time series. These equations are not easy
to formulate. However, the availability of computers has
made the formulation of these equations relatively easy.
Forecasts can be solved by solving this equation.
C.)Time series techniques
 These techniques are based on the assumption that the “past is a good
predictor of the future.” These prove useful when lot of historical data are
available and when stable trends are apparent. These techniques identify a
pattern representing a combination of trend, seasonal, and cyclical factors
based on historical data. These methods try to identify the “best-fit” line by
eliminating the effect of random fluctuations.
 Time Series is a sequence of well-defined data points measured at
consistent time intervals over a period of time. Data collected on an ad-hoc
basis or irregularly does not form a time series. Time series analysis is the
use of statistical methods to analyze time series data and extract
meaningful statistics and characteristics about the data.
 Business managers use time series analysis on a regular basis for sales
forecasting, budgetary analysis, inventory management and quality
control.
 The advantages of using time series analysis are:
a) Reliability
b) Seasonal Patterns
c) understand the past as well as predict the future.
d) Estimation of trends
e) Growth
f) time series analysis is based on past data plotted against
time which is rather readily available in most areas of study.
g) Time series Analysis helps us understand what are the
underlying forces leading to a particular trend in the time
series data points
h) helps us in forecasting and monitoring the data points by
fitting appropriate models to it.
Time series forecasts:
 Secular Trend or Simple trend or Long term
movement: Secular trend refers to the general
tendency of data to increase or decrease or stagnate
over a long period of time.
-upward trend and downward trend
Cont..time series forecasts
 Seasonal variations: the regular variations may be due to
seasons, weather conditions, habits, customs or traditions.
 Cyclical variations: 

Random or irregular variations: fluctuations which

are a result of unforeseen and unpredictable forces.
-variations may be due to floods, famines,
earthquakes, strikes, etc.
RANDOM VARIATIONS
 Random variations occur without any known reason or
explanation.
 They're the unforeseeable and unexpected changes
in demand.
 Due to unforeseen events like Floods, Earthquakes, Famines,
Strikes, War etc.
i. Trend Projection: this method is the most classical
method of business forecasting, which is concerned
with the movement of variables through time. This
method requires a long time-series data.
 The trend projection method is based on the

assumption that the factors liable for the past trends in

the variables to be projected shall continue to play their
role in the future in the same manner and to the same
extent as they did in the past while determining the
variable’s magnitude and direction.
a.) Graphical Method: It is the most simple statistical
method in which the annual sales data are plotted on
a graph, and a line is drawn through these plotted
points. A free hand line is drawn in such a way that the
distance between points and the line is the minimum.
Under this method, it is assumed that future sales will
assume the same trend as followed by the past sales
records. 
 the graphical method is simple and inexpensive but it is

not considered to be reliable because the extension of

the trend line may involve subjectivity and personal
bias of the researcher.
b) Least Square Method: The least square method is a formal
technique in which the trend-line is fitted in the time-
series using the statistical data to determine the trend of
demand. The form of trend equation that can be fitted to the
time-series data can be determined either by plotting the sales
data or trying different forms of the equation that best fits the
data. Once the data is plotted, it shows several trends.
c) Box-Jenkins Method: Box-Jenkins method is yet another
forecasting method used for short-term predictions and
projections. This method is often used with stationary time-
series sales data. A stationary time-series data is the one which
does not reveal a long term trend. In other words, Box-Jenkins
method is used when the time-series data reveal monthly or
seasonal variations that reappear with some degree of regularity.
Cont.. Time series techniques
2.) Moving Average:
MA is an improvement over the semi-average method
and short-term fluctuations are eliminated by it. A
moving average is defined as an average of fixed
number of items in the time series which move through
the series by dropping the top items of the previous
averaged group and adding the next in each successive
average.
Simple Moving Averages:
  The best-known forecasting methods is the moving
averages or simply takes a certain number of past periods
and add them together; then divide by the number of
periods. Simple Moving Averages (MA) is effective and
efficient approach provided the time series is stationary in
both mean and variance. The following formula is used in
finding the moving average of order n, MA(n) for a period
t+1,
 MAt+1 = [Dt + Dt-1 + ... +Dt-n+1] / n
 where n is the number of observations used in the
calculation.
 The forecast for time period t + 1 is the forecast for all
future time periods.
Weighted Moving Average

 Weighted moving averages assign a heavier weighting to more

recent data points since they are more relevant than data
points in the distant past. The sum of the weighting should add
up to 1 (or 100 percent).
Weighted moving average
3.) Exponential Smoothing:
 This technique is similar to the moving average, except
that it gives more weight to recent results and less to
earlier ones. This is usually more accurate than moving
average.
 This method follows the equation

 F =F
n n -1 + α (D n-1 – F n-1)
 where Fn= forecast for the next period
 Fn-1 = forecast for previous period
 D n-1 = demand in previous period.
 D.) Causal modeling techniques
This technique is similar to the moving average, except
that it gives more weight to recent results and less to
earlier ones. This is usually more accurate than
moving average.

i. Regression Analysis: Regression models are equations

created to predict one variable on the basis of known
other variables. For example- we might predict auto
sales based on the economic levels, personal income,
price, and time.
i. Econometric Models: This method makes use of
several multiple-regression equations to predict major
economic shifts and the potential impact of those
shifts on the organization. This method is useful in
answering the “what if” questions. It helps investigate
the impact of various changes in the environment and
in major segments of the enterprise.
 Economic Indicators: Economic indicators are data that can forecast
the future state of the economy. Examples of such indicators include
the current rates of national productivity, inflation, cost-of-living index,
and level of unemployment.
 (1) Leading indicators (such as new orders for consumer durables, net
business formation, and share prices) that attempt to predict the
economy's direction.
 (2) Coincident indicators (such as gross domestic product, employment
levels, retail sales) that show up together with the occurrence of
associated economic activity.
 (3) Lagging indicators (such as gross national product, consumer price
index, interest rates) that become apparent only after the occurrence of
associated economic activity.
E.) Technological forecasting
techniques
 It focuses on predicting what future technologies are
likely to emerge and how they are likely to prove
economically feasible.
 It deals with technological changes that can affect the

organization.
 technological advancements, such as word processing,

computers, lasers, and pace technologies, have greatly

affected the operations of business.
Technological forecasting techniques

i. Cross-Impact Analysis: This method attempts to

identify and determine the significance of
relationships and interactions between specific events.
To know this impact, a two or three- dimensional
matrix is developed. For example- an energy
company can use this technique to know the impact
and value of solar heating.
 Morphological Analysis: This technique is useful in
finding the multiple uses of any recent technology. It
identifies various dimensions of the object. It evaluates
all varieties and combinations of those dimensions to
find the practical uses for them.
 Substitution Effect: This technique assumes that one
technology that shows a relative improvement in
performance over the older technology will ultimately
be substituted for the factor with the lower
performance. It indicates a patterned fashion for certain
technologies.
 Business Barometers Method: This is also called Index Number Method.
Just as Barometer is used to measure the atmospheric pressure similarly in
business, Index numbers or economic indicators are used to measure the state
of economy between two or more periods. When used in conjunction with
one another or combined with one or more index numbers, provide an
indication of the direction in which the economy is heading.
 For example—a rise in the amount of investment may bring an upswing in
the economy. It may reflect higher employment and income opportunity after
some period.

 Thus, with the help of business activity index numbers, it becomes easy to
forecast the future course of action projecting the expected change in related
activities within a lag of some period. This lag period though difficult to
predict precisely, gives some advance signals for likely change in future.
 The forecasts should bear in mind that such barometers (index numbers)
have their own limitations and precautions should be taken in their use.
These barometers may be used only when general trend may reject the
business of the forecasts. It has been advised that different index numbers
should be prepared for different activities.
 The Barometric Method of Forecasting was developed to forecast the
trend in the overall economic activities.
 The Barometric Method of forecasting was first developed in 1920’s,
but, however, was abandoned due to its failure to predict the Great
Depression in 1930’s. The Barometric technique was, however, revived,
reformed and developed further by the National Bureau of Economic
Research (NBER), USA in the late 1930s.

 this method is based on the past demands of the product and tries to
project the past into the future. The economic indicators are used to
predict the future trends of the business.
 Based on future trends, the demand for the product is forecasted. An
index of economic indicators is formed.
JUST-IN-TIME and Inventory
Management
 The "just-in-time method" is an inventory strategy
where materials are only ordered and received as they
are needed in the production process. The goal of this
method is to reduce costs by saving money on
overhead inventory expenses. The company must be
able to accurately forecast demand for goods and
services for the just-in-time method to be effective.
JIT
 The just-in-time inventory method is considered a "pull"
approach in manufacturing. When sales activities warrant
more production, inventory is "pulled" and more
manufacturing supplies are ordered. The result is a
smooth flow of production and reduced inventory costs.
This method relies on signals given at different points in
the production process that tell the manufacturer when to
make the next part. Stock depletion signals the ordering
of new parts. The just-in-time method is used by major
auto manufacturers, such as Toyota, who take advantage
of synchronized assembly line systems.